Q. I like the idea of consolidating small IRA accounts to avoid fees. By chance is there a capital gains tax if you transfer a small non-IRA account to another non-IRA account in a similar category?
A. You’re correct that consolidating accounts can be efficient when it comes to fees. It also makes recordkeeping easier.
You’re going to see some differences if you consolidate IRA versus non-IRA accounts.
The only time that tax is recognized from IRA transactions is upon withdrawal, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.
“Interest, dividends and capital gains are not taxable within the IRA,” he said. “Similarly, trustee to trustee transfers are not taxable events.”
While there is no tax impact, the predecessor may charge a fee on the transfer of the assets, Karu said. Of course, you can request that the receiving trustee reimburse those fees into your account, which happens frequently, he said.
There’s one caveat in the law.
Karu said if instead of transferring the IRA directly to another trustee, the monies are withdrawn, the recipient has 60 calendar days to place those funds with a new trustee.
“It is not two months, but 60 days, otherwise it becomes fully taxable,” Karu said. “We strongly encourage not taking individual ownership of the funds in the IRA before rolling them over to the new trustee to avoid any potential tax issues on the rollover.”
For non-retirement accounts, assets can be transferred in-kind from one brokerage house to another without triggering any capital gains tax, Karu said.
But if you sell the assets and transfer the cash, there are potential capital gains.
“Most of the time, assets are easily transferable through what is termed in the industry as an ACAT,” he said. “The receiving broker will complete the paperwork with you and send it to the former broker.”
Within a few days after receipt, the assets are transferred between the two houses, Karu said.
“The only exception is if proprietary funds are held in the first account that cannot be held in the second one,” he said. “Then you’re stuck and have to sell that investment and transfer the cash rather than transferring the security.”
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